arorni wrote:
rish2708 wrote:
VyshakhR1995 wrote:
Companies that dominate an industry usually do so
by developing a competitive advantage, often control
of a unique resource or a superior technology, that
allows them to manufacture products at a lower cost
than their competitors can. Nondominant companies
that seek to increase their share of the market
generally must endure drastically lower profit margins
as they win customers away from the dominant
companies by matching their prices. Companies that
increase their market share in this way and do not
change their disadvantage in production costs relative
to those of the dominant companies will, therefore,
eventually lose their recently won market share as
prices return to normal levels.
Which of the following is an assumption upon which
the conclusion of the argument depends?
Few companies lacking competitive advantages
in costs of production that have
increased their market share will sustain
price margins lower than those of firms with
production cost advantages.
Dominant companies generally cannot maintain
their competitive advantage over long
periods of time unless they acquire additional
unique resources or develop improved
technology.
Nondominant companies can improve their
competitive positions by developing unique
resources or technological innovations
similar to those of dominant companies.
A dominant company with a competitive
advantage generally will not lower its prices
to undercut those of a firm that lacks competitive
advantages in production costs.
Acquiring unique resources or developing
superior technology is a difficult undertaking
that requires substantial investment on the
part of a company seeking to gain a competitive
advantage in production costs.
Why not option D ?
It says that the competitive once will not keep the costs lower. If it does , doesn't the whole argument of prices falling back to normal levels will fail?
Please shed some light.
Regards
Rishav
Posted from my mobile deviceHi Rishav,
Even I did the same mistake, I opted for D first. But later realized that argument is discussing about the noncompetitive company which has already used that strategy and gained market share. It will not be able to retain the same, if price increase. so the only answer choice goes with that is A.
I hope that helps.
Regards
Nidhi
Thanks Nidhi. Your opinion coupled with my introspection helped me crack it.
Annotations:
P => Profit
R => Revenue
C => Costs
DC => Dominating companies
NDC => Non Dominating Companies.
As per my understanding now,
Pdc = Rdc - Cdc
Pndc = Rndc - Cndc
We know that Cdc < Cndc and Rdc must be equal to Rndc so that Ndc increase their market share
Now, statement says, if they( NDC) do not
decrease their operating costs/manufacture costs their shares shall decrease when prices return to market levels.. meaning people won't buy
Now, in what scenario they shall sustain:
What if they keep up with low revenues ( sustain low profits i.e maintaining the equation Pndc < Pdc) then certainly their prices will be low.
And hence A shall be the answer. I get it .
And why Option D is wrong, as you said the lower price endurance has already been done by them. And the conclusions says that they shall not endure when the prices return to
normal levels meaning back to earlier levels ( that is high)
So, yeah we can't take the possibility that the DC would lower its prices further.
Thanks for this small hint, as it helped me solve the problem and check where I was going wrong.
Regards,
Rishav